PEPCO PREPARES FOR COMING ERA OF COMPETITION

PEPCO PREPARES FOR COMING ERA OF COMPETITION
Plan Freezes Rates; Gives Shopping Credit to Customers Who Choose Another Supplier

Potomac Electric Power Company today submitted a plan to the Maryland Public Service Commission (PSC) to prepare for electricity competition. The PSC required Maryland`s four investor-owned utilities to make today`s filings as part of the Commission`s preparation to start competition in the year 2000 and extend it to all customers by 2002.

Under PEPCO`s plan, total customer rates would be frozen at the rates in effect when competition begins. PEPCO estimates this average rate will be 7.78 cents ($0.0778) per kilowatt-hour. This rate is below the current average for major East Coast urban areas. The freeze would last until 2004. The only potential change during the freeze would be for unexpected changes in taxes or new environmental requirements.

Once competition begins in July 2000, PEPCO would provide customers who choose another power supplier a "shopping credit" estimated to be 3.61 cents ($0.0361) per kilowatt-hour, which is the forecasted market price of electricity in a competitive market in that year. This credit is expected to increase to 3.98 cents ($0.0398) by the end of the price freeze. PEPCO will continue to deliver electricity to homes and businesses, whether or not PEPCO supplies the energy itself.

"PEPCO`s plan protects our customers and assures them that PEPCO prices will be frozen at the beginning of competition until 2004 at reasonable, low rates," said Dennis R. Wraase, PEPCO Senior Vice President and Chief Financial Officer. "At the same time, this plan stimulates competition by allowing any customers who want to shop for another supplier to do so with a fair market-based credit."

PEPCO`s plan also allows the Company to continue to recover costs that the PSC previously determined to have been prudently incurred, without increasing rates for this purpose even after the rate freeze ends. These costs include expenses for power plants and other facilities built to serve customers, power purchase agreements, and deferred taxes and debt payments. With regulators` approval, these costs have been spread out over many years to keep customer rates down, and customers are currently paying for such costs in their bills. The PSC ruled last December that Maryland utilities would be given a fair opportunity to recover these prudent costs as part of the transition to competition.

Under PEPCO`s plan, these costs will be recovered without increasing rates. During the freeze, a non-bypassable "competitive transition charge" of under 1 cent per kilowatt-hour will be included in the frozen rates. After the freeze, the competitive transition charge will be added to the delivery charge and will decrease to about half a cent in 2006, and to about one-tenth of a cent in 2011. The charges will end in 2021 when the last of PEPCO`s pre-competition long-term, power purchase contracts ends.

The Company plans to make a restructuring proposal in the District of Columbia in the near future. PEPCO has 467,000 customers in Maryland and 220,000 in the District.

The Maryland PSC contemplates beginning the deregulation of the electric power industry in July 2000, with full competition to be in place by July 1, 2002.

Backgrounder

PEPCO Files Plan to Prepare for Competition

As required by the Maryland Public Service Commission, PEPCO filed on July 1, 1998, its proposed "unbundled rates," which break down its electricity prices into separate rate categories for generating and delivering electricity. In the filing, PEPCO`s estimated 1999 average price of 7.78 cents ($0.0778) per kilowatt/hour (kwh) breaks down into a generating (supply) charge of 4.6 cents ($0.046) and a delivery charge of 3.18 cents ($0.0318).

The Public Service Commission ordered Maryland`s utilities to make these filings in order to provide consumers with information about the separate components of electricity prices. The Commission has ordered that by July 2002 all Maryland customers be able to choose their electricity supplier while retaining their existing utility as the power delivery company. In order to take full advantage of customer choice, consumers will need to become informed about the price components that make up their electricity rates.

Proposal Would Freeze Rates Until 2004

As part of its filing, PEPCO proposes that effective with the beginning of electricity competition in July 2000, both the supply and delivery components of PEPCO`s prices will be frozen until Jan. 1, 2004. After that, supply prices will be set by the marketplace and delivery prices will be determined by regulators.

PEPCO Will Provide Full Service at Frozen Rates To Those Who Want It, and Will Provide a "Shopping Credit" to Those Who Choose Another Supplier

For customers who don`t wish to choose another supplier once they are free to do so, PEPCO will continue to provide both supply and delivery service at the frozen rates until Jan. 1, 2004. The only exceptions to the rate freeze would be for unexpected increases in taxes or new environmental requirements. During the freeze, customers who choose alternate suppliers will receive a "shopping credit" equal to the estimated market price for electricity, currently expected to be 3.61 cents ($0.0361) per kwh in 2000, and increasing to 3.98 cents ($0.0398) per kwh in 2003. This market-based shopping credit will encourage the opening of a competitive marketplace.

"Stranded Costs" Will Not Cause Rate Increases

PEPCO`s plan also allows the Company to continue to recover "stranded costs" that the PSC determined as prudent, such as the cost of power plants and other facilities built to serve customers, power purchase agreements, and deferred taxes and debt payments. With regulators` approval, these costs have been spread out over many years to keep customer rates down, and customers are currently paying for such costs in their bills.

In today`s filing, PEPCO identified "stranded costs," having a present value of $600 million, that it proposes to recover over a 10-year transition period from 2000 to 2010. The costs are composed of:

$320 million related to generation assets;
$242 million related to power purchase contracts; and
$38 million in other stranded costs.

The Company also proposes that from 2011 to 2021 it would continue to recover additional stranded costs with a present value of about $42 million for two long-term power purchase contracts.

Under PEPCO`s plan, these stranded costs, already included in rates, will be recovered without increasing rates. During the freeze, cost recovery payments of under about 1 cent per kilowatt-hour will be included in the frozen rates. After the freeze, the payments will be included in the delivery service bill and will decrease to about half a cent in 2006, and to about one-tenth of a cent in 2011. The charges will end in 2021 when the last of PEPCO`s power-purchase contracts ends.

PEPCO`s July 1 Maryland PSC filing complies with a schedule laid down by the Public Service Commission of Maryland to commence competition for one-third of customers in July 2000 and extend it to all customers by July 2002. The PSC needs enabling legislation from the Maryland General Assembly to implement its plan. Such legislation is expected to be passed during the 1999 session. PEPCO`s filing is based on an overall customer choice plan PEPCO has developed for all customers, and PEPCO intends to file a restructuring plan for consideration by District of Columbia policymakers.

Point of Contact:
Camille Smith